The idea is if you have fewer customers, you have less pricing power which means lower overhead with means merging suppliers can eliminate redundant costs such as accounting, marketing, HR and other “synergistic” areas of the business.
Large carriers have also been known for choosing large suppliers for their hardware needs as they felt these larger companies were more likely to be around to support them in the future as they roll out their solutions. Carriers think in terms of decades and continuity is crucial when providing customer services.
One of the big hardware mergers of the last decade was a joint venture between Siemens and Nokia which moved the carrier product divisions of each into a new company called NSN or Nokia Siemens Networks. Joe Rizzo reported last week on TMC’s TechZone360 that Siemens is considering buying Nokia out and taking control of the carrier division once again.
It’s worth pointing out that generally the telecom market is still in consolidation. Gary Kim in fact wrote yesterday on TMC’s sister-site Mobility Techzone that the market is rife with potential acquirers of Canadian wireless firms.
It’s worth pondering a situation where a company is looking to turn (pictured NSN hiT 7100) back the time on a joint-venture. One possible explanation is NFV has the potential to change the current world of telecom equipment manufacturers into telecom software developers. This may mean that by taking more direct control, Siemens will be able to navigate the new world of software in a more rapid fashion. This may mean the ability to spin-off assets more quickly.
In an NFV white paper from ETSI the authors mention the following as one of the benefits of this industry move:
Enables a wide variety of eco-systems and encourages openness. It opens the virtual appliance market to pure software entrants, small players and academia, encouraging more innovation to bring new services and new revenue streams quickly at much lower risk
The document further explains that by creating further abstractions, faster innovation is enabled.
There are likely arguments to be made as to why NFV is good and bad for incumbent companies serving communications service providers but it is likely more instructive to focus on the fact that software companies are generally more creative when they are smaller and nimbler.
Furthermore, carriers are telling the market they want to buy from nimbler suppliers.
This should make us ponder what the future will bring when it comes to M&A in in the carrier equipment market. It is possible that larger organizations will be able to benefit from scale as they sell their software which will run on virtualized servers but will such large organizations be able to keep up with the faster development cycles needed to effectively write the best software possible?
Time will tell but is certainly worth wondering if NFV-based software telcos will change telecom equipment M&A economics. If the industry moves in the direction the carriers want, it will need lots more companies producing solutions and this means additional equipment M&A could hurt the resulting players rather than help them.